Q3 2019 Earnings Call
Good morning, everyone and welcome to the Pinnacle financial partners third quarter 2019 earnings Conference call.
During the call today from Pinnacle financial partners is Mr., Terry Chen Chief Executive Officer, and Mr., Harold Carpenter, Chief Financial Officer.
Seasonal pinnacle's earnings release, and this mornings presentation.
Well on Investor Relations page of the website at Www Dot P.S.P. Dot com.
Today's call is being recorded and will be available for replay on pinnacles website, but the next 90 days.
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Before we begin pinnacle does not provide earnings guidance or forecast. During this presentation. We may make comments, which may constitute forward looking statements.
All forward looking statements I subject to risks uncertainties and other factors that may cause actual results performance or achievements of pinnacle financial to differ materially from any results expressed or implied.
By such forward looking statements.
Many of such back that's beyond Pinnacle financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements.
A more detailed description of these and other risks is contained in Pinnacle Financial's. Most recent annual report on Form 10-K .
Pinnacle financial disclaims any obligation to update or revise any forward looking statements contained in this presentation.
Well, that's a result of new information future events or otherwise.
In addition, these remarks may include certain non-GAAP financial measures as defined by Sea East FCC regulation G.
Presentation at the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures will be available on pinnacle Financial's website at www Dot Pete and S.P. Dot com.
With that I'm now going to turn the presentation over to Mr., Terry <unk>, Pinnacle's, President and CEO .
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Hundreds focused on revenue growth earnings growth and asset quality God, we believe that there's a three mode.
These metrics to long term shareholder returns.
That's what we focus on organic quarter out did you see Q3 was extraordinary born far apart.
The 0.6% year over year gross revenues, 90% year over year growth, yes, and outstanding asset quality metrics.
No no isn't the most primarily in previous periods in many cases mom gets measured bedroom battery illustrates the relative performance Hartford and reminder, threes with again each quarterly earnings call. When does it go but once you 14.
Oh.
You can see any impact from M&A.
By is outside of seen already you probably don't really number of other hot buttons that come down over the last five years, our balance sheet growth more importantly, our growth in revenue that need to yes, it's been remarkably branded and reliable and a few bring I think the continuation of saying when you look slope on any of those.
Metrics there, we've got a 34% five year CAGR for revenues, 22% five you're getting everybody, yes, six things that five year CAGR tangible book value is 34% five year CAGR for loans, 32% five year CAGR for deposits and ROTC now north of 80 per se.
Then in Brisbane asset quality metrics core and core route.
One thing brokered more fine well I've used the number of times on these goal is the Gulfstream strategy for long.
Yeah, and great place to work its didn't subsequently well empirical data that probably is exactly that specifically the companies have higher levels of employee engagement metrics lubrizol lower employee turnover, which frankly is just the critical success criterion for most everybody better.
Did the better profitability. So in my opinion, our obsession cultures and explanation.
Hello on all those charts, we just look back on the previous like Oh.
This slide you see live to the workplace recognitions that we've received just in the last 12 months and the ones in grain the green giant area. There are ones that we received during the third quarter. We had two major side, it's not one.
Matt This in 2015 and quickly were recognized the best place to work much smaller midsize companies in that market now recognize.
Literally the best place to work among the largest employers in Memphis and number two the last year immediately following our system conversion associated with the B and C. Integration. We were still ranked as the might think that spike in American work for and the only bank in the top 50 anywhere near our size. This year, we find another.
Three spot number 16, so why this important.
Figures may that we're headed into sloppy operating environment, There's no, saying that you can't tell the swimming naked till the time.
Having such a highly engaged workforce not only provisions better outcomes in the good times, it's even more critical to performance and the difficult times.
I know by now everyone is familiar with the business cases made from B and C acquisition. The plan was to continue the high growth CRT platforms, B and C had and bumped down to that so you're not platform, which is the principal strike or from the critical bias to make that happen was 11, our ongoing <unk> confidence in order to attract.
Entertain the best stay in a in private bankers in the market specifically when we announced merger. We said we are 65 cnine private bankers over a five year period of time did you say rig count good and his team to pass the hiring targets.
Private bankers in less than half the time the environment for luck in a great bankers in the Carolinas in Virginia has only gotten better since we launched our transaction there and so we expect the.
Continued hard rapid pace there why I'm just like any difference not one is an indication that were diligent about hitting our targets, but more importantly number two given all the terminal and industry and particularly in southeastern markets. We target, there's an unprecedented opportunity to acquire talent from larger more vulnerable buying where our.
Usually best position season, and number three it should like figures in our rep hiring will ensure efficiency as time went after this deal our efficiency ratio was adjusted was 49.65% and today were 47.5, a person had a meaningful improvement during periods when we have.
And then the rep hiring.
Thanks, Rob I'm alternate apparel from Didnt bordering writer data.
Thanks, Jerry Good morning, everybody, we've updated our revenue per share slot for third quarter results. We believe one of the best measurements, whether we are winning or losing as shown on the slide.
You can see when taking experienced double digit revenue per share growth since the second quarter.
Last year second lead a red dotted line represents the peer groups year over year growth.
As shown on the five we outpaced our peers on revenue per share growth by one party.
Keeping in mind. This is during the time, a significant internal focus around integration bike North Carolina, and more recently, managing and strategizing around inverted yield curves that said our relationship managers have remained focused on gathering plots and generating incremental revenues for our obviously because she's outsize performance has had a meaningful.
Influence on these results, we don't apologize for that at all it has afforded us opportunities to invest in our franchise, but keep the put on the accelerator or are occurring first enhanced incentives to motivate our workforce as well is allowing us to better position our franchise for future growth. Additionally, be as she has provided for outside page.
Book value accretion all of which benefits our franchise and its shareholders. There remains a lot of positive energy our franchise right now we remain on offense 24. So it's all about winning our associates or engage focus I'm excited about her opportunities for the remainder of this year and going into 2020.
Now comparing the third quarter 2019 average loans in third quarter 2018 average loans are paying off growth with more than 11%. We continue to weigh better loan growth for 29 team will be low double digits in comparison to 2018 at this time, we have no reasonably that our loan growth outlook for 2020 will be any different we're in the midst.
Constructing our 2020 plan and our management believes that low double digits, it's still a reasonable target.
We can only make the statement because the robustness of our hiring platform and the continued success, we anticipate over the next several quarters.
Impacting our volumes in the third quarter was the acquisition of advocate capital.
We're excited about the opportunities advocate for bottlers, including access to a vast network maturities, where we can all for commercial banking products with emphasis initially on gathering deposits advocate has built their franchise on delivering great service and enjoy significant Dell in their client relationships during the third quarter advocate at an approximate.
We are $155 million in loan balances with a weighted average yield of 8% plus other piece for the services. They provide their client base I'll speak to embrace blow right. So sorry.
We've shown this chart for several quarters now we also provide information with small chart recording regarding the granularity of our loan book by long time.
This small chart detailed the average commitment of our current loan book at origination compared to March 2015, the only outlier being construction construction has increased to an average commitment of almost 1.3 million, which we believe is very reasonable amount for that part of our portfolio. We offered this information. So that you can better appreciate that were not relying on extra.
George ticket sizes to hit our growth goals. The chart on the right detailed impact the discount accretion on the interesting, though as you can see by the goal while I'm discount accretion continues to be less impactful to our results.
5.7% of our net interest income and the third quarter and we believe we'll continue to be less impactful in the future. We all knew that a big headwind to our GAAP revenue growth for 29 team was an impact of less and less discount accretion and the primary way, we're going to overcome it was through balance sheet growth.
Anyway Blue bars on the chart on the right, obviously, where our attention has grown those blue bars is key to our ability to deliver increased value to our shareholders that said hopefully I'm not too distant future. We can stop shown on this chart once purchase accounting is even more so in a rear view mirror.
Next here's another slide weve been Sean for several quarters, it's an update on our loan portfolio by rate index, our long mix averages approximately 50, 55% lob Warren Prime which substantially all of a lot more credit been talking to 30 day lot more.
And about 40% fixed rates with commercial real estate being the primary contributor.
The quarter over quarter weighted average coupon for a lot more probugs credits from loan book decreased by 24 basis points for Lahore, and 43 basis point for problem, which is somewhat of a victory given we experienced 50 basis points and right.
So the spread in these categories actually one compared quarter after quarter end after considering the rate decrease of increased significantly to the spread on fixed rate credit.
Proxy for fixed rate spread performance and to keep it simple we traditionally used a five year treasury as the benchmark the five year Treasury dropped 21 basis points during the quarter, while our average white, while our weighted average fixed rate loan rate.
Dropped only six basis points, keeping the coupon on fixed rate loans near these levels would be a nice win for us and anticipate the down rate environment.
[noise] deposits, perhaps the most anticipated slot in the deck today.
Average deposit balances are up 1.7 billion year over year, our average deposit cost remained the same third quarter of 29 team from a second quarter and currently stand at 1.25%.
I would just could fluff.
Okay.
So my guess is.
Thank you Paula.
Let's go back to wholesale bike assets, we don't usually discuss the bond book or liquidity in our quarterly conference calls, but were today primarily.
That's relevant to margin performance third quarter and going forward. These two areas probably had the biggest downside impact on our NIM performance in the core.
Bond yield decreased by 20 basis points linked quarter. This is by no means unexpected we don't have appeared data yet, but we believe peer yields will see decrease in this quarter as well about 50% decline was due to reinvested cash flows while the other 50% was valuation of the books always rate decline the value that.
Look increased produced on the yield.
We anticipate additional yield contraction fourq you, but at the Middle chart indicates we've added more fixed rate assets in the bond book, which will help stabilize our yield performance going into next year.
As to liquidity, we maintain more this quarter than any quarter in recent memory. Most of this was.
Timing that we just completed a 300 million dollar sub debt offering in the second quarter of September which added to our cash balances that we acquired a large deposit from a long time plot of a similar amount regarding the offering 180 million was injected into the bank, while not committed is earmarked for sub debt.
Options at the holding company in January most of the client deposits will find its way to our wealth management unit in the fourth quarter, while the remainder will be with US until early next year, when that's a pause or pay their taxes liquidity will likely be back when the storm range in the fourth quarter.
In any of that both of these matters pressured our third quarter marked for there's a point when they have trumps net interest income and we will pay attention.
Currently we worked our plans to create as much spread income as we can grow net interest income as a wide body outside investor wants said, there's value and then there are customers, especially those that transition to relationship based on service and advice. So as a result, we remain focused on growing our cloud based on hiring the best bikers in our markets.
Now the deposit.
Most of our first focus for the third quarter was on the table on the left which looks at end of period rates. Our relationship managers. We believe did a bang up job managing our deposit costs in this rate environment.
Go shaded right bucket, we've achieved a 17 basis point decline.
This point in the right cycle, our target would be a 50 basis point bite.
Our 50% beta or 25 basis point reduction. So we're very much. Please on where we are given the most recent rate decreases were late in the quarter.
We do think we're getting close to the 25 basis point reduction beer in mid October in that particular right category.
Our relationship manager very much in tune with the rate environment and are prepared to have more discussions with our client base should rates decreased further.
Here's our challenge we have to reduce deposit rates, while same time, increasing our deposit book the fund loan growth and reduce our dependency open more expensive wholesale funding.
Our ability to accomplish this rest primarily with our new hires had continued gather deposits from their client base.
More on deposit rates.
We don't normally provide monthly information during our quarterly conference call, but wanted to emphasize the positive work our relationship managers are accomplishing with respect to lowering rates our interest bearing transaction counts.
Several might believe there is that this is merely push a button.
In our deposit systems brand, we have those accounts those are the right you accounts on the previous slide, but 65% of our interest bearing transaction counts are negotiated which means that the only person that can offer of change that rate is relationship manager.
It is part of our brain.
All banks have rate you'd accounts and all banks have negotiated write downs. We believe our approach is much different and much more intentional it's really a core relationship banking the banks Treasury, mainly made a few other number crunchers would love to call a pause often tell them to lower rates and the deep would be done.
At Pinnacle these be encountered types have to be able to convince the relationship manner or better said theyre supervisors color to call their club to lower their right and it's not only a good idea, but I'll say Rodney.
So far so good.
How are you aware, we think we'll be at the end of October but we're optimistic that we will experience continued progress on reducing rates on our interest bearing transaction accounts.
Our goal is a 50% Vega for interest bearing deposits. So we've got a waste to go to achieve our targets, but we're off to a brightstar it'll types a wild Cds RCB book is split about 60% customer and 40% wholesale the wholesale Cds will roll down fairly quickly given us an average duration of slightly more than six months.
While the customer book will take a little longer as this average duration is approximately 10 bucks.
When rates were rising we took our fair share criticism regarding increasing our deposit rates as we enter the front part of what could be an extended that right cycle, we like our office.
We will be proactive with our clients and not caught behind the curtain some problem.
I really appreciate our got legs, and we will leverage the depth of our relationships to accomplish our objective.
With the inverted yield curve in place now for several months speculation on my credit side can change should a recession occur has been on investors' minds for quite some time.
We believe we've got the best relationship bankers in the business. We also believe we on the best credit officers. This is not there first rodeo they can sense when storm clouds are beginning before.
Right now as far as credit risk is concerned based on our credit metrics and what Harvey wide and his team tell me have remained pretty darn good.
We've shown these charts before the chart provides us even more comfort that were not book in the very large commercial real estate projects.
Remains at the forefront of our model. So I hope, we never a pure complacent when we talk about correct.
For the third quarter, we experienced relatively small increase in our net charge off ratio, while north nonperforming assets and classified asset ratio decreased. So we believe that has to credit in the third quarter. We were steady as she goes I agree with other bankers that we're not seeing any systemic issues that will cause us to change our perspectives of our credit in 20.
19 or into 2020.
Now concerning seasonal.
How much will our allowance increase.
We're in the Bible stages of validating the various models, we would use to determine the allowance account each quarter.
Preliminary we believed that the allowance.
Good being a range of 70 basis points, the 80 basis points up from the 48 currently.
This amount includes a meaningful amount purchased credit impaired reserves, which will transfer and along with can transfer from love accounts into the allowance count without an impact cap capital.
At September Thirtyth that amount was about six was slightly over $6 million, which approximates the three basis points or the loan portfolio.
Now turning to these these total more than 82.6 million up more than 60% over the third quarter of 2018, as Terry mentioned BSG had another phenomenal quarter.
Their contribution was up $18 billion are greater than 126% year over year.
Oral BSG second our fee businesses have are having a strong 29 team with residential mortgage leaving the way up approximately 8% annualize this year over last year.
They've had a great first time lots of 29 team correlating not only with drops and long term rates, but also with increases in the number of mortgage originator also again great markets are helpful with lot of business. So we anticipate mortgage to finish this year strong.
Additionally, deposit the the wealth management or having mid double digit growth years, which we consider to be Exxon.
Concerning PHG during the third quarter, we participated MD Eightys analyst day in New York with several members of their executive team on hand to provide more detailed perspective on the issues business model, we feel that a lot of great information was provided during the section. So we won't go through a repeat here, but if you'd like to hear what was said I'll direct you to.
Our website.
VW Wtsp dot com, we're recording of the that will be available for rate for replay for call. It another two months.
BSG is having a phenomenal year peers.
Originations are at all time highs under this model continues to outperform that said the issue will likely begin to keep more of their credit on their balance sheet. Thus realizing more interest income rather than rely significantly on gain on site.
They believe the funding, which will allow them to warehouse these loans should be in place within the next few weeks. So we expect the revenues from the issue in the fourth quarter will be less than what has been recorded in the second and third quarters with it being more consistent with the amounts reported in the first quarter.
The Green line on the chart on the right detailed report accrual that core on their books for substitution prepayment another losses associated with barring a substitution costs for banks that have purchased credit combined for self care group.
They've been keeping the recourse accrual in about 45% total credits outstanding over the last few years to call ups or the actual loss rates in Malaysia. The total volume of credit outstanding on the books of all the banks doing business with Microcell peer group.
Columns include not only the credit loss, primarily substitution losses, but also the prepayment loss associated with reimbursement of the early payoff of these credits.
We've had a lot of conversations with Phd about their credit profiles. Their credit models are sophisticated and subject to continue all analysis bother analytics group, we believe that their business model is top shelf and identifying potential clients, who have the credit profile to be a good borrower for BSG, where the PHG keeps alone on its balance sheet or selling below and.
It was network of community banks.
Approximately 67% Microcell peer group revenue base has a stair has historically been made up of getting wholesale revenues.
However, before you also generates interest income loans that were the reader hilmoe BSG balance sheet permanently or being held on their balance sheet prior to being released at auction platform.
Since the second half of 2018 this year the building their balance sheet with on balance sheet loans with approximately 307 loans currently held on balance sheet compared to 146 million as of the end of September 2018.
They've been able to generate the operating cash required to be able to fund this loan growth.
The green bars on the left chart represent originations and wrapped up with more loans being funded which is the result of enhanced analytics and more sophisticated marketing platform.
The blue bars with the loans on which gain wholesale has been reporters as these loans replacement bankers.
With with gain on sale revenues being generated a blue bars have ramped up with more placements either through auction or one off cycles. The gold bars represent the loans about BSG on its balance sheet, which piece you've will collect interest income as we've mentioned on the previous slot.
The issue is anticipated increasing their balance sheet loans were all in agreement that balance sheeting loans. This will provide a more reliable income stream for BSG in the future through a more diverse business model.
It will take many quarters for beach to match the gain on sale revenue with interest income, but that said, we all believe it's a good idea.
Just a credit risk given BSG has been honoring the substitution pause for so long any incremental credit risk associated with keeping more wells on its balance sheet should the middle.
Even with all this change we still believe these you should see 10% growth and earnings in 2020 from what they anticipate realizing and 29.
So now briefly to expenses most significant run rate matters to discuss urban in sense as we mentioned in the press release, we increased our incentive accrual in third quarter, but don't expect our fourth quarter approved to be nearly as large.
We're also pleased to report that retention rates continue to increase that went two important things for us our class can count on consistent service and employee turnover continues to shrink at our workforce engagement initiatives are taken hold in our newer markets as those associates are buying into our culture.
The last few years are Expensed average asset ratio excluding merger expenses has been in the 1.9% range, we don't see that changing materially as we head into 2020.
Lastly, yesterday, our board of directors approved an additional 100 million dollar share repurchase authorization for open market purchases of our common stock.
This authorization extends through December 2020, and begins upon the exhaustion of our current authorization, which has approximately $30 million remaining funds available for common stock repurchases.
We intend to use every bit of this authorization, but we will do a rationally over the next 15 months.
With that I will turn it back over to tier.
Thanks Harold.
As higher on discussed on last quarter's call, we modified our longer term operating ranges our previous measure if you put in place in 2012, and we believe the granularity that werent provided by those previous measurements were important at that time.
And the has served its purpose, but now we're often go with a higher level of guidance with operating range as far away they aren't TCV and tangible equity as our current yet.
Faraway, we're targeting a 145 to 165.
Percent range as you can see for the third quarter, we're operating high in that range at 1.62%.
We also introduced ROTC and tag book equity ratio is to new managers that will continue to highlight for you going forward.
We were in the Ryan ROTC and at the higher levels with the tangible equity ratio. Our go to maintain these ratios in the top quartile of our peer group overtime.
Finally, we challenged HR for we continue believe that were in top quartile.
Lower mbps and tangible book value and then our peer group, we're laser focused on rapid reliable growth and EPS intangible book value. Our tangible book value is up by more than $5 to share in the last year or slightly over 20% and as you know our incentive systems are designed to take every person in focus.
Todd the on the EPS growth as I've mentioned, the number time before our Blake banks. It can rapidly in reliably grow as intangible book value overtime produced shareholder returns as you can say on these chart growth there has been both rapid and reliable.
The slide and you're looking at here is assigned slab.
To close quarterly earnings call in January .
And use it to try to set expectations for 2019 in the third quarter I think we hit the ball that.
The first bullet point, we had a 14% linked quarter annualized ready to grow for core deposits and took our cost of deposits down 11 basis points during the quarter.
The second all we had an 11.3% linked quarter annualized rent growth for loans to the third bullet point, we had a year over year growth rate for adjusted EPS of 19.8%.
The four other Bowen, we've exceeded our aggressive hiring plan of Cnine private bankers in conjunction with B and C. Merger. We've also added similar success across the entire footprint and considering all types of revenue producers, including not only the relationship managers, but other revenue producers like broker mortgage originators.
Insurance agents and so forth, we've hired 67 year to date, while not them in the EPS growth right or the efficiency ratio that speaks to the.
Good morning, well into the last bullet point, we continue to grow tangible book value up 20.6% year over year, So Joe I will stop there and take questions.
Thank you Mr. Turner the floor is now open for your questions. If you like to ask a question at this time. Please press star one on your Touchtone phone analysts will be given preference day Mcewen day again, we do as to why you pose your question they pick up your handset to provide optimal sound quality.
Your first question comes from Jared Shaw with Wells Fargo Securities. Your line is now open.
Hi, good morning, guys.
Hi, there.
Its a great if I could start with on the deposit side, there's another another quarter, where you're able to see deposit growth outpaced loan growth do you think that weve turned the corner now and if we look at.
You know whether its year over year average deposit growth or.
Quarterly deposit growth outpacing loan growth should we expect to start to see that loan to deposit ratio come down and.
Do you feel like you've gotten sort of permanent traction there or is there are still going to be some more quarterly fluctuation.
Yes, I don't think we'll see the loan deposit ratio go down we should expect to see deposit growth through natural swell in the fourth quarter.
I know I've got some like we were talking about what we call I've got that one large deposit or who's balances will come down some of the fourth quarter he's transferring.
Much of that deposit into our wealth management unit. So we'll have those kind of fluctuations.
But as far as.
Will we see deposits outstrip loans in the fourth quarter I can't really speak to that I think I think we've got a lot of energy around deposit growth.
I think our folks are focused on it.
So.
We anticipate fourth quarter haven't that's well though.
Okay.
And then on BSG, that's great color and obviously it was good color on the Investor day, as well can you remind us as we look into 2020 with the with portfolio more on the balance sheet. Yes, a couple of questions. One where do you think that reserve I know they don't necessarily call. It the reserve, but the.
There there.
Recourse accrual where does that ultimately go as they build out that balance sheet as a stay in that 4.5% range or or what should we expect to see that grow and then where does the revenue split between gain on sale and net interest income sort of flow by day by the end of 2021. So most of those funding lines are in place.
Yes, I think for gain on sale to match interest income, it's going to take at least all of 2020 and probably into 2021 before we get like a 50 50 split that I think al was talking about on analyst day.
As to the recourse accrual recourse obligation at 45% some of that a male is tied up in prepayment losses.
So I doubt.
With the on balance sheet numbers.
You don't necessarily need to create a reserve for pre payments.
Because those revenues hadn't been recognized yet so.
There are 4% to 5% I don't know for the on balance sheet loans, whether or not we'll need to be that.
At elevated so that makes sense.
Yep Yep, Okay that sounds good color. Thanks, and then there's finally on the for me on the on the incentive comp.
So are you close to accruing at sort of a 100% based on on goals or could we continue to see that that drift up as we as we go through the end of the year.
Yeah, we're at 115% of our target.
At the end of September .
We think we've got a good shot to maintain that number.
Here in the fourth quarter.
As far as what the fourth quarter accrual looks like.
It will look a lot like what we accrued in the second quarter.
Going into the fourth quarter.
We believe right now.
Okay, great. Thanks, Thanks for the questions.
Thank you.
Your next question comes from Jennifer Demba with Suntrust. Your line is now open.
Thank you good morning.
Hi.
Couple of questions.
Harold you had a pretty steep increase in other fee income.
From second quarter third quarter anything unusual in there.
And is that a good run rate going forward or is it more like second quarter.
I think it'll be a decent run rate going forward, we have some swap revenues that we we booked this quarter over the second quarter. So.
I'm not anticipating a big drop.
Going into the fourth quarter.
Okay.
And Terry could you talk about the rationale for.
Acquiring advocate capital what you like about the business model and and your interest and other types of specialty lending company.
Yeah.
So.
Advocate GAAP, though.
And as a targeted.
Financier for.
Plaintiffs attorneys.
It is a great business and great business model. They you can see they originate.
Hi, quality loans that higher yields not dissimilar to the way the HG does it it's a value added approach in their case the value add is that they provide accounting software that enables plaintiffs attorneys to recapture the interest expense.
And in in the settlement proceeds and so.
Thats a thing that required to specialize accounting mechanism to get done that's the value that bad and so as a result, driven that they're able to capture the.
Financing.
Specifically for cases, however that bike lanes on all the receivables of the firm so.
Again, it's.
It's a value added approach to produce a higher yield from a high quality.
Borrower.
We as you know, we like those kinds of businesses.
The deal.
That it's a business we understand we know how to underwrite those loans not that where the experts say all but again, it's just a business that we understand and our approach is always make sure you've got some value add not compete on price and so thats what this business does.
Part of the Honey for us on this transaction is they've only been.
Providing lending products, but we believe that weekend, perhaps enhance some of their lending products, but more importantly, we settled the full suite of Treasury services and we've got initiatives underway right now to initiate gathering deposits through.
Clot said so.
On a standalone basis, we feel like it's I answered transaction and then when you add the.
Revenue synergies that we believe we'll get out of it it's a very handsome transaction.
Well the leadership team stay in place there Terry and and are they locked up for certain period of time.
Yes leadership team does stay in place and they are lot.
Higher level leave for three years.
Three years Jennifer.
Thank you very much.
Thank you Ken next question comes from Stephen Scouten with Sandler O'neill. Your line is now open.
Good morning, guys.
Good day.
Nice quarter nice quarter it as usual it seems like I'm curious what you're seeing in terms of growth trends in your markets I know to hit your targets you don't really depend on the underlying growth as the markets you depend more on your hiring activities, but I'm curious.
Kind of how that dynamic will play out in terms of if you're expecting to see here or are seeing still overall market growth or more of your growth is truly dependent today on the new hires.
Yes, Steve let me.
Make sure I'm clear I don't I don't have detail information rockets, okay. Here's a presented here not breaks down and so but I don't mind to give you what Mike.
Good deal is for how that works.
I'd like overtime always the biggest portion of our.
Loan and deposit generation is a function of market share takeaway and and so that is tied to.
Higher great bankers and haven't moved their books of business as you know that.
Our belief is that takes probably four years' time on average for them to consolidate that book of business and so again the people that have been hired say over the last four years are still in the process of consolidating their books, taking market share and that would be the big as part of the grow both loans and.
Deposits by far I think if you're looking for what is the market condition.
They are relationship managers would tell you that just the volume growth is probably slower today than it would have been several quarters ago. I don't think it's dramatically slower, but they think it would be modestly slower than three quarters ago, just in terms of pure economic loan growth pure economic demand.
Okay perfect very helpful. Thanks, and then maybe Harold if if we're looking at the core NIM it looked like that.
That's helpful slightly obviously by advocate capital, but may have been down.
You know maybe in the 10 basis points sort of range ex that and and with the detail you given the slide deck around new loan yields it looks like those were pressure down maybe 35 basis points are so quarter over quarter on new yield. So how much downside I guess do you think we have from here in that in that core NIM based on what you're seeing on new loan yields and and continue.
You'd expectations for a for fed cuts.
Yes.
Yeah, I assume and we've got one bed cut built in our model for December .
The.
We believe that our margin the GAAP margin is pretty close to get stabilized.
There's probably some more dilution to go.
Here in the fourth quarter, but I think.
Bob Bond yields will stabilize.
If we get to more rate cuts next year, then we'll probably have some lag, but we think that we'll be able to drag these deposits down.
To kill to help offset that so.
Assume one rate cut in December we probably got anywhere from.
Call. It 10 to 15 basis points of NIM contraction at a GAAP level.
And with that our purchase accounting.
We'll.
We'll obviously be less impactful.
Okay and are you I know you've got the 38 million dollar estimate for a 2019 accretion or you discussing at all yet what you expect to see in 2020 Herman accretion standpoint.
No we haven't gotten the that yet.
Probably coming out pretty quickly.
We went from 64 down to 39, so there'll be another probably meaningful drop you can you can kind of I guess, where that might it okay and one last clarifying question I could on the expense run rate I mean, you were more like a $133 million. So this quarter. If we took out the seven and a half of where you think.
The accrual rate will revert back to Twoq levels is it fair to assume you think expenses will be in that kind of mid to high $120 million level in a in Fourq you.
Yes, I think that's a fair number.
Great. Thanks for the time guys appreciate it.
Thank you. Your next question comes from Pat Robertson with Piper Jaffray. Your line is now open.
Hey, guys good morning.
Hi, Brad Brad.
Wanted to 'em go back to deposits and just talk about the piece of <unk> lowering the deposit costs and I know the CD book part of its wholesale can you just talk about it would the pace in the fourth quarter.
You know be five or six basis points on interest bearing cost basis, and then possibly higher as we go into the first quarter can you just give us an I.E. The magnitude of has as you roll the CD book and grow the core deposits as well kind of what you're expecting on that.
Yeah, I think we should realize some meaningful decrease in average deposit rates going into the fourth quarter or for the fourth quarter.
We were at 125 in the third quarter, an average deposit rates, we probably will be.
Maybe as much as call it 10 to 12 basis points for that for the fourth quarter.
And then that will extend into the first quarter of next year.
So we're thinking we've got no anywhere from 15 to 25 basis points.
Deposit cost reduction here over the next call it six months.
Okay. That's good color.
And then the other question I was just Terry you talked early in the call about the sloppy environment. You know I'm just curious if there are things that you're strain away from or you think is.
As brisk in the environment and as we think about 2020 in particular.
And it do we see balance growth and CRB and CNK <unk> can you give us maybe color on what some color on what's your more emphasizing given the current environment.
Yes.
I think.
I would say that if you just if you were at the Monday morning meetings, where we've made with all our salesforce the messages that view with here would primarily be around deposit acquisition and lowering the cost of funds on the existing books, although that's where most of the energy and emphasis is.
When you think about the credit risk.
And.
So forth in there I think we communicated in the past the broad areas with concerns which would be hospitality in particular and.
To a lesser extent multifamily in urban core, but again, we don't have a hard stop on anything with exception of hospitality and that I would say is primarily just because we're at.
We've got all of that we won't is not because we think the.
Credits are necessarily difficult, but just from a portfolio management standpoint, we are.
At or above our concentration guidelines. So that's only things got hard stop on it.
Again, I think if you just to maybe help you with Smith side for US just go back to the way we grow our loan book is to hire people and so people are moving their books and that's where the loan growth comes from and so it did they are certainly at times when we're saying, okay. We're not taking the more this asset class for that asset class, but.
It's really more driven by the books the various relationship managers that we hire control.
Okay. Appreciate all the color.
All right Brett.
Thank you and your next question comes from Tyler Stafford with Stephens. Your line is now open.
Hi, good morning, guys.
Good morning, Hey, I wanted to circle back on I think Gerons earlier question just around the incentive comp. That's did you say you're currently occurring at 115% or 150 person 150, or 115 115, okay. So have a power for a reduced your information we have a cap at 125. So we can't go any.
Okay. So I guess that would put you guys that around kind of a 41 million dollar.
Expense incentive comp expense at the baseline and then just trying to think about 2020, what that number could look like is that should that kind of grow in mid teens kinda range off a day, 100% accrual.
Just given the hiring so okay I think I think your math is good.
So that's probably not that probably not abandoning okay perfect.
I appreciate the spot deposit cost at the end of the quarter 117, I just wondered Harold if you'd be willing to share the spot margin at the end of the quarter at 930.
Yes, I wish I could.
I don't know necessarily know if I've got it.
I can probably calculate up calculate of rent spread but.
We still believe going into the fourth quarter, we've got some dilution in the margin common.
So I'll just leave it that okay. That's fair.
Maybe just a minor one with within the margin just geographically where the market index deposits located my.
My assumption was it was all in the Cds for some reason, but I'm just curious if you could share where those are just cross deposit product types, where those are at yeah. I think they're all over the place I think there and interest bearing checking accounts I think are in money market accounts I don't think theres there.
There are not.
There to larger depositors' by and large I'm, not saying, there's not some smaller departures in there, but theyre primarily to bigger the larger deposit.
Okay.
Thanks, and just lastly, just given that.
The transition of BHP over the next several quarters from the gain on sale. The balance sheet do you think you can maintain your.
Your your profitability targets within that range over the near term as you kind of digest that transition Beachy.
So that will more time tower. So I'm just wondering what what the transition of ph D. and the revenue outlook you gave there with the step down coming in the fourth quarter and then the year over year, 10% growth 2020 versus 2019 I'm. Just wondering if you can still maintain our away Anoro we went in.
The the range that you've given just over the near term as you digest that transition.
Yeah, I'm not I'm not I'm not run those calculations for them, specifically, but it seems like the profitability metrics will be more difficult given the size of the balance sheet, our OE numbers, probably not so much they'll probably be fairly consistent.
But with guar away numbers, so I'm not sure.
Okay.
Alright, Thanks Harold.
Thank you and your next question comes from Steven Alexopoulos with JP Morgan. Your line is now open.
Hey, guys. This is anthony on for Steve.
Hi, Tony.
So just a follow up for me on C. sold. So appreciate the color you provided for the loans to count on a go forward basis have you calculated what your estimate is for the day one impact here reserve levels.
Yeah I think.
They want to impact will be that.
I'll call it getting into that 70 to 80 basis point threshold. So.
We'll probably be.
Somewhere close to where we are at the end of a third quarter as of the in the fourth quarter barring any unforeseen challenges the fourth quarter presents but.
No it's looking like.
That they want adjustment will be the delta between.
The 48 that were at hand.
Call. It 70 to 80 that we'd like it will be.
Got it after the.
After that action after sense, yet and next for me on expenses, So came a little bit high because of the incentives this quarter or would you still expect to improve the efficiency ratio for full year 19 versus 18 inclusive of incentives in the third quarter.
Give me a second.
I think.
I think.
There are probably what we're looking at and they are going into 2020.
As we don't plan for an outsized incentive accrual.
So we'll have that savings in the plan we're looking at.
Oh, we still think we've got some operating leverage to create a lower efficiency ratio.
But it won't I don't think it'll be meaningful.
I don't think it'll be at Turner, I'll, just probably put it like that.
Got it.
Finally from me your expectation for GAAP NIM declined 10 to 15 basis points for the December rate cuts.
That decline for the fourth quarter, specifically or is that the full impact from the December rate cut so sometime in early 2020.
That would be for the December right in the fourth quarter.
I don't we're not planning on.
Absent any rate cuts in 2020 and.
We've just not done the sensitivity analysis around additional rate cuts in 2020.
But.
You know going into that once we we'd like to fourth quarter will be fairly close to the bottom on our margin on our GAAP margin.
If we get more rate cuts in 2020, which is you know I'm not naive I think theres strong likelihood to that.
Then we'll have to.
Go through and recap, where we think our margins will well, we'll go with bodes well, we just haven't gone through that sensitivity analysis or we have im just already talked about it too much right now.
Okay. Thank you.
Thank you. Your next question comes from Stewart lots with KBW. Your line is now open.
Hey, guys good morning.
Hi Stewart.
Most of my questions have been answered already but I guess, just one follow up on the expenses I appreciate the color.
On the incentive comp and kind of where you see that run rate going forward.
Just looking at this quarter.
<unk> expenses were down about three and half million anything one time in there and is that kind of the runway we can expect.
Going into Fourq you.
Now.
We had the right all we had the write off in the second quarter of those we had some branch assets and some other assets that we charged off in the in the.
Second quarter. So that was primarily the reason for the for the reduction.
Okay got it appreciate the color on.
And I'd just won in terms of capital.
Now with.
The increase buyback authorization.
Got it 30 million left before year end you expect to.
Through that before we get to the you know the hundred million and 2020.
In terms of do you have a plan in place is that kind of.
Hi, how do how should we kind of model that up.
Utilizing that buyback.
Yeah, I think you should probably.
I'm not to be Kurt just assume.
That we've got a $130 million left not got five quarter suspended.
Fully intend to spend.
So that 30 is that expire at year end.
The 30 expires in the first quarter of next year.
Yes.
Well the share price will dictate a lot of that.
And a lot of people ask of questions about what those share prices might be for us to do the buyback and.
To be honest with you will will I.
I think the overriding.
Statement here is that we're going to spend the money.
Yeah, I will take that.
All right that's it for me thanks for calling all right.
Thank you.
And your final question comes from Brian Martin with Janney Montgomery. Your line is now open.
Hey, guys.
Hi, Brian Hero, just just a few clarifying point to the common and BHP with this that the step down in for Q2, a more normalized level. If you go back to first quarter level and you're kind of in a low ninetys your expectation when you're talking earlier is if we look at that full year number and 10% plus growth in 2020 is how to think about BH.
Even with this transition in the models that is that correct.
I think so.
That's right.
Okay tied to make sure I heard what you said and then just as it relates I think you made comments about the GAAP margin and given that accretion was a little bit higher this quarter. When you look at fourth quarter and the core margin in your impact I guess, how you're thinking about the core margin, which was what maybe kind of the mid three twentys. This quarter, how do you see the core margin in.
The fourth quarter.
Playing out with with the but the rate cuts in your outlook for one more in December .
If I get if I get 10 to 15 basis points than contraction in my GOP margin just call. It as we sit here today.
But core margin shouldn't contract that much because we're not anticipating as large of a purchase accounting Jim.
Our contribution in the fourth quarter.
We were at 11 million here in the.
In the third quarter, we were at 8 million in in the second quarter. So.
We just we think the fourth quarter is going to be less than the 8 million.
Okay from an accretion standpoint, right I guess.
Okay and the the impact from each when you guys look at it today based on what you've seen with your relationship managers I mean, your expectation Harold Summit, if reached 25 basis point rate cut you I guess, what what do you see as the the impact to the margin. If you look forward I guess, if we look to 2020 and potentially seeing.
More rate decreases out there.
Yeah, I think as we see more right and decreases out there we will get closer to what we were doing back call. It two years ago.
You know will find our way back to deposit rates that were.
Significantly lower than where they are today.
Okay got you Okay, and then just your last comment earlier comment about the efficiency ratio I guess I just want make sure that was you were talking about 2020 versus 2019 as far as kind of maybe holding its own are staying flattish.
Metro year to full year right, Okay, Alright, and then.
Final thing for me was just on M&A I guess, you guys have talked about.
Yes. This in the past carry you've outlined it any changes in kind of what you're seeing on on the M&A frontier.
Following the addition of advocate here any other.
Non bank things, you're looking at or is it more banks.
Specific today.
I would say.
So let me just order rate gas was I think what I hope we've said before I think this with record with Joe.
Which is we've sort of communiques markets, we want to be and we've communicated got what our M&A criteria or.
We.
We have said theyre not very many deals that would meet that threshold and so as we.
Hi, good, particularly exacerbated by relatively low share prices.
Our currency is not as strong as it has been in other periods of acquisition. We said, we'll go to these expanded markets, which have changed either acquisition or on the novo basis, and I think we've said on the de Novo basis, probably has more build today than at any time.
I'm in our history.
Because of just the tremendous volume of people and talent that are in play.
And.
So that's sort of what we think about bike him and I would just give you a hard stuff no never but again.
I, just think de Novo expansion.
Might be.
The best route.
For our for our company.
In terms of non bike deals as big very honest way those are.
A little more opportunistic again in the case advocate capital that's because we.
Now on over a very long period of time, we participated in are granted over an extended period of time and.
So again.
When we can find oh.
Companies that have some value I add in terms of financial services declined those are the ones that have been able to us.
And again with an emphasis on their ability to grow at a rate commensurate with us.
Okay. That's helpful. I appreciate it Terry thanks.
Hi.
Thank you. Your next question as a follow up question Vince do at lots of KBW. Your line is now open.
I'm actually good sorry about that guest.
Alright. Thanks.
Thank you.
And your next question is a follow up question from Tyler Stafford with Stephens. Your line is now open.
Hey, sorry about this guys. Thanks for taking a follow up I just want make sure I'm understanding the cadence of the of the margin expectation that Harold I'm not trying to pin you down, but just I guess.
Thinking about it out loud <unk>. So the margin should have a b b lower following the September caught a then you've got the 10 to 15 basis points hit from the December cut that you kind of expected to see and then there's some accretion headwinds in 2020, I'm just trying to flip.
To the expectation that the margin should bottom in the fourth quarter can you just if I understand that correctly can you walk through the just the cadence of that.
Yes, I think Thats right I think we believe right now barring any additional rate cuts in 2020, we think the margin will.
Kind of flatten out in the fourth quarter, that's going to be.
We're gonna have to get.
Serious own more serious on deposit cost reductions I think we can do that and I, we think our fixed rate loans will likely not see further.
Call It a reduction in the pop and their loan yields so.
Right now that's how count that's where we're modeling.
Okay, but the 10 to 15 that is from the December is that right.
In terms of us what you're assuming internally.
So I think most of the tend to think that come from the September cut and we think we'll be able to cover a lot of a rate cut and from December going into 2020 got it okay that clears it up thanks, so much I appreciate it alright. Thank you.
Thank you I'm not showing any further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.